Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Is a U.S government pension subject to Canadian tax?
Paragraph 1 and subparagraph 2(a) of Article XVIII of Canada-U.S. Income Tax Convention.
March 27, 2003
Re: U.S government pension
This is in reply to your undated letter regarding U.S. government pensions which was received by us on August 6, 2002.
You ask our opinion as to whether the U.S. government pension that you will receive when you retire is subject to Canadian income tax. You have also asked us about the "clawback" of the Canadian Old Age Security Benefit ("OAS"). You advise that you are currently employed by the XXXXXXXXXX and that your employment income is not subject to tax in Canada pursuant to Article XIX of the Canada-U.S. Income Tax Convention (the "Convention").
Opinions concerning proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. For more information concerning advance income tax rulings, please refer to Information Circular 70-6R5 dated May 17, 2002, issued by the Canada Customs and Revenue Agency ("CCRA"). Copies of information circulars and interpretation bulletins referred to herein are available from your local tax services office or on the Internet at the following site - http://www.ccra-adrc.gc.ca/formspubs/menu-e.html. Consequently, we can only provide you with the following general comments.
Once you retire your U.S. government pension will no longer be subject to the provisions of Article XIX of the Convention. Pension remuneration is specifically excluded from this Article. Instead, your U.S. source pension income will be subject to the provisions of Article XVIII of the Convention.
Essentially, Article XVIII of the Convention provides that the U.S. source pension will be taxable in Canada to the extent that the pension would be taxable if you lived in the U.S. Also, the Convention provides that the U.S. may also tax the pension income according to their domestic law but the amount of the tax cannot exceed 15% of the gross amount of a periodic pension.
If your U.S. government pension is subject to a 15% (or lower) tax in the U.S., you will be allowed foreign tax credits on your Canadian income tax return for the U.S. taxes withheld on your pension income. The CCRA's general views on the foreign tax credit are found in IT-270R2 entitled Foreign tax credit.
To determine whether your OAS will be subject to any clawback, you should refer to the federal worksheet in the Forms 2002 T1 General Ontario. We note that if you have an OAS repayment in 2002, income taxes may be withheld on your 2003 OAS payments starting in July 2003. The amount to be repaid is calculated on a graduated scale and, for 2003, is applicable to net incomes between $57,879 and $94,148. In other words, if your net income for 2003 is more than $57,879 you will have to repay some of your 2003 OAS and the amount of the repayment increases as net income increases. Once net income reaches $94,148, all of the OAS received in the year will have to be repaid.
If you are still working, but are entitled to old age security, note that the clawback is based on net income not taxable income. Since the deduction in computing Canadian taxable income under Article XIX of the Convention is after net income, your tax-exempt employment income will be included in your income in determining whether your OAS would be subject to clawback.
For further information regarding the OAS, please call toll-free 1-800-277-9914 (Human Resources Development Canada)
We trust our comments will be of assistance to you.
Mickey Sarazin, CA
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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